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Bill Steinman
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Charity Without Fear

The question most asked by our readers during the past year was this: What does the Foreign Corrupt Practices Act say about charitable contributions? It comes up so often because all American and U.S. public companies are subject to the FCPA’s antibribery provisions, and most have citizenship programs overseas that involve supporting public and private charitable causes. So they need to be sure their donations are FCPA compliant. That’s not always easy to figure out. The FCPA itself doesn’t mention charitable giving, and the DOJ and SEC have never issued any formal guidelines about it.

When the question first came up around here, we turned to Pete from D.C. (above), a compliance professional who’s logged a lot of miles. He helped us with a post that first appeared nearly two years ago. With a few updates we’ve included, here’s what it said:
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No good deed goes unpunished, or so the saying goes. That sure came true for Schering-Plough. From February 1999 to March 2002, the New Jersey-based maker of Afrin, Claritin, Coricidin and Cipro, among other leading drugs, violated the Foreign Corrupt Practices Act through overseas charitable giving.

According to the Securities and Exchange Commission’s June 2004 complaint, the company’s subsidiary in Poland made improper payments to a charitable organization called the Chudow Castle Foundation. The Foundation was headed by an individual who was the director of the Silesian Health Fund during the relevant time. The health fund was a Polish governmental body that, among other things, provided money for the purchase of pharmaceutical products and influenced the purchase of those products by other entities, such as hospitals, through the allocation of health fund resources.

The SEC said Schering-Plough Poland paid 315,800 zlotys (approximately $76,000 at the time of the payments) to the Chudow Castle Foundation to induce its director to influence the health fund’s purchase of Schering-Plough’s pharmaceutical products. The SEC also said that none of the payments to the Foundation were accurately reflected on the subsidiary’s books and records and that Schering-Plough’s system of internal accounting controls was inadequate to prevent or detect the improper payments.

As a result, Schering-Plough paid a $500,000 civil penalty and consented to an SEC order requiring it to avoid violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. It also had to retain an independent consultant to review its policies and procedures regarding compliance with the Foreign Corrupt Practices Act and implement any changes recommended by the consultant.

Schering-Plough’s case, as far as we know, remains the only FCPA enforcement action based entirely on charitable giving. We’re talking about it now because it raised important compliance concerns that still linger. For example, how much due diligence is expected of companies with respect to their overseas charitable donations?

At an FCPA conference a couple of years ago, an audience member posed that question to Mark Mendelsohn, the head of the Department of Justice’s group that prosecutes FCPA cases. He said each donation has to be considered on its merits, but there are always common-sense guidelines that help determine if donations could violate the FCPA. Is there a nexus between the charity and any government entity from which the company is seeking a decision? If the governmental decision-maker holds a position at the charity, that’s a red flag. Is the donation consistent with the company’s overall pattern of charitable contributions? For Schering-Plough, the SEC said that “[d]uring 2000 and 2001, the payments constituted approximately 40% and 20%, respectively, of S-P Poland’s total promotional donations budget. Moreover, the Foundation was the only recipient of such donations that received multiple payments, making the four payments in 2000 and seven payments in 2001 highly unusual.” If one donation or a series of them is more than the company has made to any other charity in the past five years, that’s a red flag too.

Beyond the points made by Mark Mendelsohn, there are other smell tests for charitable donations. Who initiated the request for payment to the charity? The key to most bribery charges appears to be the personal benefit to the government official, or the quid pro quo expected of him or her. If a government official hinted at or begged for a payment to the charity, that’s another red flag. Will there be a tax deduction for the donation? In most countries, one important result of any gift to charity is tax relief. Therefore, not seeking the tax benefit can become yet another red flag.

And one final point. All due diligence concerning charitable payments — the asking and answering of the questions posed above — should be well documented. Nothing will aid in defending against a potential FCPA charge more than a stack of contemporaneously-generated papers backing the story that the payment really was meant to be a charitable contribution and not a bribe. Don’t be shy about it. Create real-time documents that demonstrate awareness of potential FCPA issues and measures taken to manage and mitigate the risk. That, after all, is what compliance is really about.
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Schering-Plough Corporation trades on the New York Stock Exchange under the symbol SGP.

View the SEC’s Litigation Release No. 18740 (June 9, 2004) here.

Download the SEC’s civil complaint in Securities and Exchange Commission v. Schering-Plough Corporation (D.D.C. 2004) here.
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